Canada's cable giants fight back against pick-and-pay TV model

The unbundling of TV channels would threaten the profit margins of companies including Rogers Communications Inc., Telus Corp. and BCE Inc., which bring in about $10 billion a year in revenue from TV subscriptions

Canadian cable-TV providers are pushing back against regulators’ efforts to allow consumers to pay for only the channels they want, in a test case that has implications for U.S. companies from Comcast Corp. to Walt Disney Co.

The unbundling of TV channels would threaten the profit margins of companies including Rogers Communications Inc., Telus Corp. and BCE Inc., which bring in about $10 billion a year in revenue from TV subscriptions that have traditionally required viewers to pay for a set package of channels. Allowing consumers to instead pick and choose only the ones they want to watch would also have implications for a resistant U.S. industry, which also supplies networks in Canada.

While consumers have long called for lower monthly bills, distributors and channel owners argue that without the bundles some smaller networks may disappear or less money may be spent on original content, according to Laura Martin, an analyst at Needham & Co. Channel owners — like Disney, whose Disney Junior channel airs in Canada, and Comcast, which offers CNBC and E! — distribute their channels in bundles to ensure they get enough viewers and advertising dollars to support production.

“In the U.S., the cable companies will look to see what comes out of it and maybe just as important is for the media companies to monitor and see how that effects them,” said David Heger, an analyst with Edward Jones in St. Louis. “The effect could be that some lesser channels get pushed off the air.”

Canada’s cable giants, including Rogers, Telus and BCE, are meeting with regulators in Ottawa next week for hearings on the future of TV to push back against the government’s effort to become one of the first countries to implement a la carte TV options. Companies have already taken a step in the direction of pick-and-pay TV — such as Telus’s option to choose among more than 100 individual channels once a basic subscription has been paid for.

The current model benefits the big three and other cable companies

“The current model benefits the big three and other cable companies, but if they implement new regulations I can see the big cable guys taking a hit for that,” Kevin Chu, an analyst with Accountability Research in Toronto, said in a phone interview. “It’s very profitable.”

Rogers generated C$1.81 billion ($1.66 billion) in cable service revenue last year and BCE made about C$2 billion, according to their 2013 annual reports. Shaw Communications Inc. and Telus don’t break out revenue from TV alone. The nation’s entire cable industry made C$11.2 billion in 2012 from 8 million subscriptions and employed 25,000 people, according to Statistics Canada.

The Canadian Radio-television and Telecommunications Commission, known as the CRTC, is proposing a slimmer basic cable service — limited to local channels, educational services and feeds from provincial legislatures — that might be capped at C$20 to C$30 a month. After buying the basic pack, consumers would be able to pay per channel or build their own packages with just the channels they want.

If adopted, the base of subscribers is likely to shrink, leading to higher prices for individual channels, particularly sports, Toronto-based Rogers said in a June submission to the CRTC. Rogers paid C$5.2 billion last year for the rights to air National Hockey League games in Canada for 12 years.

Unbundling services will also endanger the ability of content producers to take risks on new programs, BCE said.

Disney, among the American firms heading north to attend the hearings, needs the wide distribution of bundles to sustain the revenue it needs to invest in new programming, according to the Burbank, California-based company’s submission. Kevin Brockman, a spokesman for Disney, declined to comment further.

The push for unbundling is part of a larger pro-consumer drive by Canada’s Conservative government that’s included pressing for more competition in the wireless phone market and stopping business from sending spam e-mails to consumers. In October, the government said in its annual agenda-setting Speech from the Throne that Canadians should be able to choose the combination of TV channels they want.

Andrew Harrer/Bloomberg

Rogers, BCE, Telus and Shaw have all underperformed the country’s benchmark index this year, which is up 15%. Rogers is the worst performer with a 7.1% drop, while the other three companies are up this year.

Some cable companies like Rogers and Telus already allow consumers to construct their own bundles or pay for specific channels individually once they’ve subscribed to a basic group of channels.

Consumers increasingly have more options to replace traditional cable-TV subscriptions with online viewing.

Canadians — especially 18- to 34-year-olds — are watching less traditional TV but making up for it by streaming more shows online, the CRTC said today in a statement on its website. The percentage of English-speaking Canadians with Netflix subscriptions rose to 29% in 2013 from 21% in 2012, the CRTC said.

Netflix started its Canadian streaming service in 2010 and has since signed up 4 million customers, according to Adam Shine, an analyst at National Bank of Canada. Last week, Rogers and Shaw announced a streaming service of their own called shomi. It will feature shows such as “Sons of Anarchy” and “New Girl” and has the potential to generate as much as C$1.5 billion in revenue, Shine wrote in an Aug. 26 note to clients.

Trying to force content on people not only irritates them, but it drives them to alternative platforms

“Trying to force content on people not only irritates them, but it drives them to alternative platforms,” said Ted Woodhead, Telus’ senior vice president for regulatory affairs. Telus’s answer is to offer channels a la carte, while bundling similar networks like sports or children’s shows together in 16 different “theme packs.”

Jason Laszlo, a spokesman for BCE, and Patricia Trott, a spokeswoman for Rogers, declined to comment beyond the CRTC submissions.

The U.S. hasn’t seen the same type of movement toward a la carte, either from regulators or companies, Heger said.

In the larger U.S. entertainment market, dismantling packages of networks could put more than two-thirds of channels out of business, endanger 1.4 million jobs and potentially jeopardize about $117 billion in market value, Martin, the analyst with Needham, wrote in a December report — one of the few estimates of the economic implications of unbundling TV.

“The outcomes that we’ve predicted in the U.S. would be consistent with the experience Canada would have in a fully unbundled ecosystem,” Martin said in a phone interview.

Still, many consumers just don’t want to pay for content they don’t watch.

“I realized I’m paying about C$140 a month, two-thirds of that I never look at,” Bruce Cran, president of the Consumers’ Association of Canada, said by phone from Vancouver. “Every Canadian that watches television in Canada is pretty much in the same position.”

Though the hearings probably won’t result in a total move to customers choosing all of their channels, it’s likely that the CRTC will succeed in implementing a smaller basic cable package, said Greg MacDonald, an analyst with Macquarie Group Ltd. in Toronto.

The cable companies are trying to make the evolution to Internet-delivered programming as orderly as possible, MacDonald said by phone. That transition is inevitable, he said.

“With the success of Netflix and the proliferation of content over the web, I think we should all ask the question, ‘Can we really stop this?’” McDonald said.

If Friday's gains are anything to go by, investors are champing at the bit

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